It comes up all the time, a builder will say “50k off of a certain home”. You as a buyer already have a pre-approval from a lender you are completely satisfied with, and are ready to use you just need to find the right home. You walk into the builder and the home they have is perfect you love the 50k incentive to make the purchase and then while writing up the contract the builder says “oh ya, by the way that incentive (50k off the home) is only if you use our (the builders) “preferred lender”. (a lot of times it is the builders own direct mortgage company ie: for Meritage Homes its Meritage Mortgage Company.) So now what do you as the buyer?

Well the situation is a common one and one that essentially breaks most of Federal the RESPA (the real estate laws that deal with anti-trust and kickbacks) laws on the books. So let me break this down in a couple different ways to give you a better understanding.

If you were buying essentially any other property that wasn’t being purchased from a developer, it would be a major RESPA violation to force a buyer to use a certain company to qualify for certain incentives, and the participants could face fines, loss of licenses, all kinds of things.

EX: A Realtor is selling a home and tell the buyers that if they want to get some money off the home then they need to use (and can only use) a certain mortgage company….

Or if a real estate brokerage tells a buyer client of theirs they are only allowed to use a certain mortgage company to do a loan. NOW truth be told real estate professionals and brokerages always do make recommendations. I believe that is part of their job they do this everyday and know who does good work and keeps promises. The key is that no real estate agent/ company or participant can limit a buyer to a certain company or service to allow a deal to happen, or allow the client to qualify for a special incentive. Even when a buyer on their own chooses to use the “in-house” company whether that be; mortgage, insurance, title, etc paperwork disclosing the relationship should always be given and signed by the consumer to show them the direct relationship.

Now with what I just explained in the previous paragraph one would think the answer is No a homebuilder cannot make us use their lender to get the incentive on their home…….However in the real world they can do this and do it regularly. Why? Well in my dealing and understanding they do it because no one really (the Justice Department) calls them on it and sanctions them for it. The profits builders make are enormous when they can tie up deals and use several subsidiaries that each individually profit on each home sold. Most builders alone have a mortgage division, an insurance division, and a very tight relationship with a title company that allows the builder to get very cheap prices on their policies for “volume” business. So what can you do?

Well this depends how bad a builder wants to sell. Even though every builder says the same thing you can’t get the incentive without using their lender. I have seen it where they waived that rule to make a sale, it is far from normal and this happens very rarely but especially for very quick close spec homes they will lots of times allow another mortgage company to close it if the closing can happen asap. You as a buyer will need to show that your current mortgage company can make the closing date. Also if you have a certain loan that is fully approved with another mortgage company and that builder’s mortgage company doesn’t offer that exact loan or can’t qualify you for it, most times if you threaten to cancel the sale and get ridiculous about it they (the builder) will allow you to use your own mortgage company, while retaining all incentives. Other then that, you will be very hard pressed to get a homebuilder to allow you to use your own lender vs. their preferred or company owned mortgage provider. So why are builders so strong on this policy you maybe asking?

Home builders are so strong on this policy because like a lot of financial companies profits for originating mortgages is very high. If a homebuilder can make a buyer use their own mortgage provider then they can make an additional profit that would of never existed otherwise. In addition they don’t have to do any marketing or business prospecting. All the mortgage companies future clients are walking through the builders door every day. These builder owned or preferred lenders are rarely ever super competitive while they don’t necessarily “rip-off” a customer, they are owned by the home builder who is highly motivated to make as much as possible from every sale they make and home they build. So do not be surprised if your mortgage rate is 1/8% higher then other companies will give you, and if your closing costs turn out to be roughly 5-10% higher then other outside companies. After all the builder’s mortgage lender has no real competition since the builder is locking you the customer in with them. My recommendation here is to use a GFE (Good Faith Estimate) to compare what the outside world will provide you vs what the builder’s mortgage company is offering. Negotiate for a lower rate and better terms, many times the builders lender will re-adjust if they are challenged however don’t expect anything if you as a buyer don’t do your homework.